What to be aware of be­fore you in­vest in hedge funds

Weekend Argus (Saturday Edition) - - GOOD WEEKEND -

◆ Skewed in­dices. RE:CM ex­ec­u­tive chair­man Piet Viljoen says you should not rely on hedge fund in­dices, be­cause they have two ma­jor prob­lems:

❑ Back­fill bias. If, for ex­am­ple, there are five hedge funds, and three are un­suc­cess­ful and two are suc­cess­ful, hedge fund man­agers will pop­u­late the in­dex with the suc­cess­ful funds, while the un­suc­cess­ful funds will not make it into the in­dex.

❑ Sur­vivor­ship bias. As soon as a hedge fund closes or goes in­sol­vent, it is re­moved from the in­dex, along with its per­for­mance his­tory.

◆ Sta­ble as­sets un­der ◆

man­age­ment. Viljoen says there are good hedge funds and good hedge fund man­agers out there, but they are very pri­vate, very se­lec­tive re­gard­ing their clients, and not easy to ac­cess.

“A good hedge fund man­ager is not the guy with 20 irons in the fire but a man­ager who is do­ing one thing, has been do­ing it for a long time and is do­ing it well. Such a man­ager will have sta­ble as­sets un­der man­age­ment rather than be­ing an as­set gath­erer.

“Fund man­agers who prac­tise as­set-gath­er­ing are gen­er­ally act­ing only in their own in­ter­ests. An easy way to spot such man­agers is by the num­ber of dif­fer­ent prod­ucts (or funds) they man­age. Any more than five or six should send out a strong red flag to in­vestors,” Viljoen says.

The fund man­ager’s ethics. This in­cludes the fees the man­ager charges, prod­uct pro­lif­er­a­tion, his or her at­ti­tude to­wards dis­clo­sure, and com­mu­ni­ca­tion with prospec­tive and ex­ist­ing in­vestors.

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